If you have worked in the food and beverage industry, then it is likely that you have participated in a tip pool at some point or another. Tip pools are quite common in restaurants, bars, and other establishments where employees customarily receive tips from the customers they serve. In these situations, restaurant workers who receive tips are required to “pool” their tips together so they can be divided out among other employees in proportionate shares after a shift is over.

Restaurant tip pools are not illegal in and of themselves, but there are very strict requirements that restaurants must meet in order for the tip pool to remain valid. Many of these rules relating to restaurant tip pools may surprise servers, bartenders, and other food and beverage employees because many restaurant owners violate them on a frequent basis.

So, when is it legal for employers to require tipped employees to participate in restaurant tip pools and when is it illegal for employers to require tipped to participate in restaurant tip pools? In order to answer these questions, it is first necessary to understand the basic legal requirements of the “tip credit” under the FLSA.

The Tip Credit

The Fair Labor Standards Act (“FLSA”) is one of the nation’s oldest federal employment laws, dating back to 1938. The FLSA is a broad law that covers child labor, minimum wage, and overtime pay. The FLSA generally requires all employers to pay all employees at least the federal minimum wage (currently $7.25 per hour). One exception under the FLSA is the “tip credit.” The tip credit allows employers to pay tipped employees less than minimum wage, and as low as $2.13 per hour, by counting the tips received toward the employer’s obligation to pay minimum wage. The end result is that employers taking the tip credit do not have to pay their tipped restaurant workers the regular minimum wage and, instead, can pay them $2.13 per hour. In fact, in South Carolina, almost all waiters, servers, and bartenders are paid $2.13 per hour plus tips.

Notice of the Tip Credit

An employer taking the tip credit is required to tell all tipped employees about the tip credit and provide the required notice to tipped employees that they are taking the tip credit. Without the proper notice of the tip credit, then the employer cannot legally claim the tip credit and must pay tipped employees at least minimum wage (currently $7.25 per hour). An employer may not take a tip credit unless it informs all tipped employees, in advance, of the following:

1.  The amount of cash wages to be paid;

2.  The additional amount of wages claimed as part of the tip credit;

3.  That all tips belong to the employee, except as in a valid tip pool; and

4.  That the tip credit shall not apply to any employee who has not been informed of these requirements.

Employers sometimes argue that displaying a Department of Labor poster with information relating to the tip credit complies with the law. Courts have held, however, that a poster is not sufficient notice to entitle the restaurant to the tip credit. Employers often fail to provide tipped employees with the required notice of the tip credit at the time of hire, but failure to do so results in the tipped employee not being subject to the tip credit at all and thus being entitled to the full minimum wage for all hours worked.

In addition to properly informing tipped employees of the tip credit, restaurant employers must also allow all tips received by tipped employees to be retained by the tipped employees. At the end of the day, tipped employees’ tips belong to the tipped employees who earned them and they are the property of those tipped employees and not the property of the restaurant or bar that employs them. The exception to this rule is that the FLSA does permit restaurants and other employers of tipped employees to require its tipped employees to participate in valid tip pools. Valid tip pools are where the employer gathers a certain amount of tips from its tipped employees and then distributes the tips among other employees who “customarily and regularly receive tips.”

Who Can Participate in Tip Pools?

Only employees who customarily and regularly receive tips are allowed to participate in restaurant tip pools under the law. This means that only restaurant employees who interact with and serve customers in the front of the house, such as waiters, servers, and bartenders, may participate in restaurant tip pools. On the other hand, restaurants cannot require waiters, bartenders, and other front of the house staff to share their tips with back of the house restaurant employees who do not interact with and serve customers, such as chefs and cooks, dishwashers, janitors, and bouncers.

For example, restaurants violate the FLSA if they require servers, waiters, and bartenders to place their tips into restaurant tip pools and then distribute some of those tips the restaurant tip pools to the kitchen workers or cooks. Kitchen workers and cooks do not customarily and regularly receive tips, nor do they regularly interact with customers, so restaurants invalidate restaurant tip pools by including them in it.

Can Restaurant Owners and Managers Participate in Tip Pools?

No employee that falls under the FLSA’s broad definition of “employer” can participate in restaurant tip pools. This means that it is improper for restaurant owners or bar owners to receive any of the money put into restaurant tip pools. This remains true even if the owner is performing functions like waiting tables and serving drinks.

Likewise, supervisors and managers are usually not allowed to participate in restaurant tip pools or receive any of the money put into restaurant tip pools either.

What Happens if My Employer Requires me to Share my Tips with Non-Tipped Employees?

Quite often, employers illegally include such back of the house employees in restaurant tip pools to help cover that employee’s hourly wage. Employers violate the FLSA and invalidate the entire tip pool when they do so. When an employer violates the strict legal requirements for restaurant tip pools, then the tip pool is no longer valid and the employer cannot claim the “tip credit” at all. This can be a costly mistake for employers because this means that instead of paying waiters and bartenders $2.13 per hour plus tips, they will be required to pay them $7.25 per hour plus tips (in addition to the other damages set forth below). That difference in pay over the course of two to three years can be quite significant. Tipped employees must either be permitted keep all tips or their employer must have a valid tip pool consisting of only proper tipped employees participating in the tip pool

Tip pool lawsuits have been on the rise of late and have gained a good bit of attention over the last few years. This is for good reason because many employees are required by their employers to participate in invalid restaurant tip pools. In these situations, servers, waiters, bartenders, and other tipped employees may be entitled to significant damages from their employer, including the difference between $2.13 per hour (which was paid under the tip credit) and $7.25 per hour for every hour the employee worked. In addition to the full minimum wage all hours worked, employees may also be able to recover liquidated damages wherein the court will double the amount of an employee’s owed wages. Employees required to pool their tips in invalid restaurant tip pools may also be entitled to overtime pay if they were required to work more than forty hours per week, in addition to prejudgment interest, postjudgment interest, and attorney’s fees and court costs.

Do I have to Pay the Restaurant for Breakage, Spillage, or Customers who Walk Out without Paying their Tab?

The FLSA requires that tips either be kept freely by the tipped employee or that they are distributed strictly to tipped employees through valid tip pools. If a restaurant makes its tipped employees pay for customers who walk out on their bill (“dash and dines” or “walk-outs”), uniforms, breakage, or spillage fees, then they are in violation of the FLSA and the tipped employees could be entitled to damages.

The bottom line is if you are a tipped employee who thinks you may be subject to an illegal tip pool, you should reach out to an employment lawyer in South Carolina to discuss your rights.